Perspectives: Greece: The final curtain? (7/6)     Print Email

mzeiner01By Markus Ziener, Berlin

By many, the outcome of the Greek referendum is considered to be a defeat for Europe. But is that really true? Just imagine if the Greeks had voted “Yes”: This would have signaled the start of another endless round of negotiations with a government and a country that is at odds which each other. At least this is safe to say: Alexis Tsipras and the people of Greece are on the same page when it comes to the reforms advocated by the EU-Commission, the European Central Bank and the International Monetary Fund: They don't like them and they don't want them. And given the bank run of last week they are certainly aware what that could eventually mean: Bidding farewell to the Euro.

At least the stage is prepared for the next meetings of European leaders. Either the heads of the Eurozone are willing to further water down the set of rules of Europe’s single currency by pushing through huge exemptions for Greece. Or they insist that key principles of the Euro framework are not negotiable – and stop keeping the Greek monetary system afloat. After the referendum, the leaders have crystal clear choices. This is, by all means, not the worst situation.

If the Euro were only a technical question, the answer would be easy. Greece had to leave the Eurozone in order to strengthen it. The country is economically not only unfit for the single currency, but granting special treatment to Greece – beyond what already is in place – is nothing less than a slap in the face of those countries that are bravely and tenaciously working their way out of the mess, i.e. Slovakia, Portugal, Italy and others.

Just as a recap: Greece joined the Eurozone when the Euro was introduced in 2002. It benefitted a great deal from the low interest rates for bonds denominated in Euros compared to past bonds in Drachma. Unfortunately Greece didn't use those financially pleasant years to reform and restructure the domestic economy. Instead, it got used to an artificially high standard of living. Once the Eurozone got into trouble – after the financial crisis that was triggered in the US – Greece, as part of the Euro, couldn't devaluate its way out of its’ misery anymore. The many gaps and defects in the Greek system became dramatically apparent.

Now many Greek politicians are blaming Europe – in particular Germany - for letting this happen. Europe, goes the narrative, should have stepped in earlier and not fed a corrupt system with cheap money.

Germany stepping in and telling Greeks what to do or not do? Germany of all places? We have been there - around 70 years go. It turned out to be a rather bad idea. So if there is something Germans had learned from the past: You better stay away from lecturing.

Now, economically it seems quite clear what to do after the referendum. The Eurozone writes off the 300+ Bill that Greece owes to countries and institutions. Greece will return to the Drachma. And Europe will give additional help for Greece to survive the next, say, two difficult years until they have settled in with a new currency.

Politically though, things are rather less evident. The reason: While the majority of Greeks has a quite clear picture of what they want - Europe does not. On this side the various players all have a different agenda.

German chancellor Angela Merkel is not really keen of being the one that has to oversee a Greek exit from the Eurozone. She personally may be able to live with the label: “It happened on Angela's watch”. But, both her conservative party and the Social Democrats, currently junior partner in a grand coalition, don't particularly see a great selling point in being the ones who sealed Greece's fate. German public opinion is split on the Greek subject. While a majority wants to see them out of the Euro, at the same time many Germans want a soft landing for Greece – whatever that means in practical terms. Merkel, who religiously listens to pollsters, is quite aware of that mood.

French president Francois Hollande is particularly cautious when it comes to punishing Greece. Why? Because France itself is not living up to the rules of the European Monetary Union. Paris is pushing the bar on the debt ceiling regularly. Since 2009, France has taken up more debt than allowed by the Maastricht criteria (new debt limited to annually 3 percent of GDP, maximum national debt 60 percent of GDP). France is therefore more accommodating , while Germany, Finland and the Netherlands are more on the tough side.

With the introduction of the Outright Monetary Transactions (OMT) program, the ECB's Mario Draghi also tends to be soft on Greece. OMT is the tool for buying bonds of Eurozone countries – even of those with a rather bad bond credit rating. So far, OMT has not been used. But the mere introduction of the instrument is highly controversial. Critics say, OMT is diluting country risks. Why? Because if a country fails to service its debt to the ECB, i.e. all Eurozone countries, carry the risk. Or in other words: OMT promotes moral hazard. It will turn the Eurozone into a huge transfer union making it easy for member countries to escape reforms.

Finally the IMF: Lately Managing Director Christine Lagarde has given quite some cover for the German minister of finance, Wolfgang Schäuble. Schäuble, who is the preferred scapegoat of the Greek public, seems to have established quite a good understanding with Lagarde. She sticks to principles, does not want to accept a bad compromise with Greece and can take some heat. As long as the IMF is unwavering, it will be difficult for Greece to milk the international finance system even further. But the influence of the IMF has its limits. Not to forget: Due to its role in various crises in the past the Fund is quite unpopular among Social Democrats and the youth.

Now, what is going to happen? “If the Euro fails, Europe fails”: This was Angela Merkel's mantra in the past weeks and months, reiterated multiple times. Many found it reassuring, because it indicated that the German chancellor would do whatever it takes to keep the Euro intact. But what this statement in fact means remains unclear. Why? Because the Euro could fail both ways: If Greece stays in – or if Greece leaves.

Perspectives is an occasional forum of The European Institute reflecting member and guest views on topical issues.